It’s hard to get excited after looking at the recent performance of Callaway Golf (NYSE: ELY), as its stock has fallen 8.4% in the past week. It seems that the market has completely ignored the positive aspects of the company’s fundamentals and decided to weigh more heavily on the negative aspects. Fundamentals usually dictate market outcomes, so it makes sense to study company finances. In particular, we will be paying close attention to Callaway Golf’s ROE today.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how efficiently their capital is being reinvested. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
See our latest review for Callaway Golf
How is the ROE calculated?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, Callaway Golf’s ROE is:
3.2% = US $ 117 million ÷ US $ 3.6 billion (based on the last twelve months to March 2021).
The “return” is the income the business has earned over the past year. This therefore means that for every $ 1 invested by its shareholder, the company generates a profit of $ 0.03.
What does ROE have to do with profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.
A side-by-side comparison of Callaway Golf’s 3.2% profit growth and ROE
It’s hard to say that Callaway Golf’s ROE is very good on its own. Not only that, even compared to the industry average of 26%, the company’s ROE is quite unremarkable. For this reason, Callaway Golf’s 28% drop in net income over five years is not surprising given its lower ROE. We believe there could also be other aspects that negatively influence the company’s earnings outlook. For example, the company has misallocated capital or the company has a very high payout rate.
In a next step, we compared the performance of Callaway Golf with the industry and found that the performance of Callaway Golf is depressing even when compared to the industry, which cut its profits at a rate of 0.9% in the past. during the same period, which is slower than the business. .
Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. Is Callaway Golf valued enough compared to other companies? These 3 evaluation measures could help you decide.
Is Callaway Golf Using Profits Effectively?
Although the company has paid part of its dividend in the past, it currently does not pay any dividends. This implies that potentially all of its profits are reinvested in the business.
All in all, we are a bit ambivalent about the performance of Callaway Golf. Although the company has a high rate of profit retention, its low rate of return is likely to hamper its profit growth. That said, we looked at current analysts’ estimates and found that analysts expect the company’s earnings growth to improve slightly. Indeed, this could bring some relief to shareholders. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
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